Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Good afternoon. Thanks for joining us. We're getting to the back end of the conference here. So thanks for joining late in the day on Day 2. Next up, we have Universal Display. For those of you who aren't familiar with the company, I always call it, it's Qualcomm-like position as it relates to OLEDs. So in terms of intellectual property and in their case, materials, the emitters that go into that market as well. And so presenting on behalf of the company, we have Brian Millard, CFO. Brian, thanks so much for joining us.

Yes. Thanks, Scott. I appreciate you having us. Thanks to ROTH for hosting. Before we kick off, I just have a quick safe harbor statement. So I may make some forward-looking remarks as part of my comments today, and our actual results may differ from those we would encourage anyone considering investing in the company to review our filings with the SEC.

So that's a great disclosure because then we will just jump right in on recent comments. So in terms of 2025 guidance, right, the kind of wide range out there, but 3% kind of down the middle. Kind of take us through what's factoring into the guidance right now just from a high level, what you're seeing? And I know there's a range out there kind of high level and low level, the swing factors?

Yes. So for 2025, we put out a guide of $640 million to $700 million. So the midpoint, $670 million at the midpoint. It's about 3.5% growth off of where we were last year. And that reflects industry growth, depending on which analyst firm you look at, probably in the 5% to 6% range. So our growth rate just being slightly less than that. In terms of kind of what the various factors are at the high end and the low end, I think there's a lot of macro uncertainty this year just in terms of how various end markets may end up. And so we just wanted to take into a variety of different possibilities that may play out just based on some factors this year that are a little bit different than what we've seen in the last few years.

So maybe let's jump in on some of those end markets. Historically, smartphone has been a big driver, and you guys are 50-plus percent penetration into that marketplace. So there's growth, but not as much. It's small display size, so not huge in terms of acreage. But IT in general, right? So tablets, monitors, computers have been a big driver. It's getting up to almost, I think, 10% of the mix now in terms of square footage or acreage. How is -- what are the big drivers there? What are you guys seeing on that front in terms of demand? And is that really the big drivers we start to think over the next 2 to 3 years?

Yes. So there's really 3 key end markets that we monitor. The first, as you said, Scott, is smartphones, which just for the first time last year, Eclipse 50% penetration. So all the premium models that are out there sold globally have OLED displays for the most part. And we've seen increasing penetration even in the mid-tier and low end of OLEDs continuing to take share from LCD in that space. So a lot of room to grow, we think, still in the smartphone market. . And IT, as you said, right now, we're about 3% to 4% penetrated in the IT segment. And there's a lot of momentum in IT. That's certainly, as you look forward the next few years, that's the segment that we see as the highest growth rate because there's a number of OEMs that plan to introduce OLEDs into their product portfolios over the next few years. We saw that last year the iPad Pros for the first time had OLED displays, and we think that there's many leading brands that plan to introduce OLEDs into their IT portfolio in the coming years. And evidence of that is really that our customers, many of them have announced new capacity investments that they're making in capacity for the IT market. And IT is really tablets, laptops and monitors. And so Samsung has announced an investment that they're making. It's expected to be ready for production in 2026 based on our understanding. BOE has also announced an investment they're making new capacity for IT expected to also be online next year. And then most recently, Visionox, which is another one of our Chinese customers announced capacity that's expected to come online thereafter. So $20 billion of investment that those 3 companies have announced. And they're clearly making those investments because they see an opportunity in terms of the OEM product road maps over the next few years.

Again, that's Gen 8.6 stuff, so it's IT focus.

Exactly. Gen 8.6. It will be IT focused. It will have the ability to make smartphones if desired. But our understanding is our -- the needed capacity is really for the IT market based on a lot of the OEM road maps in the coming years. And that penetration of 3% to 4% today, many analysts that track the industry are estimating that by 2030, that could be about 20%. So a lot of opportunity for that to grow. And the size of those displays being larger than smartphones also is a compelling opportunity for our business because that's more surface area for our material to cover.

So in terms of surface area and the one market we didn't hit on is TVs. So the simple math is 100 smartphones equals 1 TV roughly, depending on the size. So a huge, huge opportunity there. But that market has kind of been slow to develop, right? As we look out over the last couple of years, it started to ramp pretty quickly and then sort of -- there's still growth, but it's, I think, tracking below prior expectations. So what's kind of behind that? Is it simple pricing in the marketplace? Or is there something else going on?

Yes, it's a great question. I mean, certainly, the TV market, I think the TV market more broadly even independent of OLEDs has been a little bit stagnant over the last few years. I think that also has to do with folks consuming media on tablets and other devices. So the TV growth market -- TV market growth has not held up. In terms of OLED, I think that OLEDs have come down significantly in price compared to LCDs and other technologies. So it's much more competitive on price than it was years ago. But it is still a premium offering. It's also a premium display in terms of the quality. So for people who value and prioritize the quality of the displays, the true blacks, the contrast ratios, all the visual benefits of OLEDs, it's a no-brainer to pay a few hundred dollars more and get the OLED display. But for a price-conscious consumer, there still are cheaper alternatives. And so I think that, that gap, we would expect to continue to narrow in terms of price over the next few years. And -- we have -- we're optimistic it will continue to grow. It's just not historically been the rate of growth we would have expected.

Let me ask you along those lines, OVJP, which enables you to print materials on a much larger substrate. Is that a requirement to open up the TV market or no? It's that's like to get -- drive deep, deep penetration below -- to above 20%, 30% or something like that. Can we get to good growth rates before OVJP?

Yes. So OVJP is printing -- dry printing technology as it was developed by the company. It stands for Organic Vapor Jet Printing. We've been performing R&D for a number of years on the technology. We set up a subsidiary in California a few years ago to advance the progress of that program, have had a lot of great progress in that over the last few years. And we still think it's a great opportunity for display going forward. We did recently announce a little bit of a strategic pivot, and we are closing down the California operation and transitioning to an R&D team in Singapore that will be focused on assessing not just display, but also non-display opportunities for OVJP. As it relates to the TV growth and continued penetration there, there's sufficient capacity today in the TV networks that are manufacturing fabs that our customers have. So there's opportunity for us to continue to see strong growth in TVs. Right now, there's probably capacity about -- for about 10 million to 12 million units of TVs annually. And the estimates are this year, there's probably going to be about a little more than 7 million units sold. So a lot of opportunity for growth independent of OVJP, but we still think that OVJP is a great cost-effective platform in the long run for TVs.

Maybe shifting to the macro for a minute and maybe start with tariffs. Last time around when we saw tariffs go into effect on China, there was a big pre-buying, I think, that occurred ahead of that cycle. Didn't seem like that happened this time. Can you clarify if there was any prebuying? And then maybe what tariffs in general are kind of representing in terms of impact to you? I know it's not direct in many cases, it's going to be indirect through some of your OEMs. But what are you seeing out there? What are you anticipating?

Yes. So in terms of the buying patterns and the inventory levels, we haven't seen anything out of the ordinary at our customers. It's been fairly consistent. That said, I'll say that consistency has also been a little bit haphazard in the sense that some customers of ours have had a little bit more variable and lumpy ordering patterns. And I think that continues to be the case. Specifically, our customers in China have historically had a little bit of a lumpiness to their ordering patterns. In terms of tariffs, I think what we've been doing internally for a number of years now is making sure that we're looking at our supply chain, both in terms of where we manufacture, but also how we source our raw materials to make sure we have diversity and we provide ourselves with optionality as best we can. So key to that was setting up manufacturing in Ireland, which we did starting in 2021. We have a manufacturing plant in Shannon, Ireland, where we can manufacture products and ship directly to our customers from. And that continues to be a great lever, not just from a tariff perspective. But also just making sure we have capacity in our network to meet the demand that we see in the next few years because we were running out of capacity in the U.S., and we knew we needed additional capacity and finding a non-U.S. source we thought was a great way of just diversifying our supply chain.

How much capacity do you have in Shannon?

When fully operational and by that, I mean all phases of CapEx and development, it will have doubled our capacity compared to previously. And it's a large campus. It's about a 16-acre campus, a number of structures that we are using a portion of it at this point, but we have room to continue to grow as volumes grow and the industry continues to expand.

And then maybe just on the macro front, there are some high-level concerns. Just wondering if you're seeing that or hearing any concerns from your customers or elevated inventory levels of or anything of that nature?

We've not seen anything out of the ordinary at this point, but we're certainly monitoring things, and we'll be providing an update in early May here.

So I'm proud of myself, we talked for 10 minutes without getting to blue. So now it's time to talk about blue emitters. So you guys said in '24 and then more recently in your updated as well, months, not years. So take us through months, not years, right? How do we interpret that just in terms of what you guys are saying and how that translates into time lines of commercial specs and how that flows through ultimately to designs and revenue.

Yes. So for folks not familiar with our materials, we saw phosphorescent red and green material today that are used to create OLED displays. Blue is the third color to create displays. And we've had a technology project underway for many years in R&D to invent blue material. And we've announced in 2022 that we thought in 2024, we would have commercial performance of that material. We've now had a little bit of a delay to that time line, but we continue to feel you're very confident in the project and the progress that we're making, the level of customer engagement and interest as well as in the broader OEM community. We know that phosphorescent blue will be very beneficial for our customers in the industry. And that benefit is really on the energy efficiency that it will bring. It will be about a 25% increase in the energy efficiency of that display by introducing phosphorescent blue in place of the fluorescent blue that's being used today. So we're still working closely with our customers, providing them with development quantity of material to use for their testing and R&D on their side and still believe very much that we will be confident we'll be successful in commercializing the material. There's typically about a 9- to 12-month design cycle from when we will hit commercial specs and our customers will believe that it's ready for use to when you would see a product in market. That's typically what we see on the red and green side and we would expect the same with Blue once we hit commercial specs.

But just to clarify, in the months, not years, that time line effectively started December 31. Is that correct?

Correct. Yes. So we said the months not years was in reference to the delay beyond 2024. So yes, it was at the start of this year.

And to just go back to Blue commercial specs, what are the -- what are the gating factors? What are the key elements that your customers are really looking for commercial lifetimes, brightness? What -- where do you need to get to when you're talking about hitting those commercial specs?

So there are 3 characteristics when we're developing any of our materials, whether it's red, green or blue. The first being, what is the color? So how deep or light is the color. So is it really deep blue or is it light blue. The second being energy efficiency. So how much energy does it consume to emit light. And then the third being, what's the lifetime. So how many years would it last under a normal use case by a consumer. And of those 3, lifetime has been the most challenging to get to the commercial spec. We've seen improvements in lifetime. And it's really challenging to have all 3 of those characteristics in one material because you can solve for one of the characteristics, but you might be shifting the other out of spec. So really having one material set that has all 3 performing at the commercial levels is the challenge. But we continue to feel confident in the path that we're on and that we'll be able to get there.

Do all customers have the same required commercial specs or are you talking about a standard level and then they may vary based on the individual customers?

There's a general spec that we believe would be suitable for the industry that we're targeting at this point.

Okay. And then you go back to the time line. So assuming sometime this year, it's 9 months probably until we see commercial product at your customers or commercial product as an end product in the marketplace.

Yes. So once commercial specs would be achieved, whatever date that might be, it's typically 9 to 12 months beyond that when you would see a product in the marketplace.

So you're talking about in a smartphone at that point in time. So you would see revenue, obviously ahead of that maybe by 6-plus months in terms of selling into your display customers who are then selling to the various smartphone OEMs or whoever the customer base is.

Yes. And it remains to be same whether it's a smartphone or another application that would be first to market with phosphorescent blue. That's something we just don't have visibility to at this point. We're focused on hitting the commercial specs. But yes, it would be typically 9 to 12 months and increasing revenues, as you said, from commercial specs to ultimate commercial introduction because we're -- we would need increasing quantities that our customers in order to go through mass production runs and prepare for that commercial introduction.

And I think you've indicated you're basically engaged with all your major customers on this front. So is that correct, right? There's some level of blue engagement for every meaningful customer that you guys deal with?

We've multiple customers in multiple regions that are working on phosphorescent blue with us.

In terms of the overall market opportunity, I think green is at a $250 million run rate. How realistic is it to think about blue achieving that? Once you hit go from commercial spec, is it going to rival green? Is it going to be bigger than it because there's effectively no competition and you have pricing power. How do you guys think about it? Because your share should be 100% certainly out of the gate.

The quantity of green and rip Blue into display are very similar. So from a quantity perspective, if they were equivalently adopted in -- across our customer base, the quantities would be similar. The pricing is one that we've not yet reached commercial pricing for blue with any of our customers. Those are conversations that we'll continue to have with them as we get closer to commercial introduction. But we believe there's a premium price associated with blue. We've spent a significant amount of time and resource over many years to bring this to market, and we believe there's a premium price associated with that. I think that's understood. The adoption curve and exactly what that looks like is very hard to predict at this point, which models go first. Are those more premium models with larger volume? Or how does it exactly look. That we need more information, we're focused on getting to commercial spec that enabling our customers to introduce it. We know there's significant interest, not just from our customers but from the OEMs and the broader market in introducing this. So we do think it will be adopted. There's no reason why it shouldn't be used. But like anything, there will be an adoption curve and the exact slope of it is very hard to predict at this point.

Just in terms of AI, right? So we hear a lot more about that, obviously, in terms of devices at the edge. And if you look at smartphones, it's increasing the power requirements and processing requirements within the device itself. And outside of the processor, the display is the biggest consumer of power. So how important is this in the overall context of shifting more and more AI to mobile devices? Are customers talking about that? Is this a meaningful conversation that you guys are having?

The energy efficiency, whether it's red, green or blue is something that our customers are continuously going after. So if you look even on the red and green side, where we've been selling material for many years, 10-plus years in the case of both colors, we've been able to increase -- or decrease the energy usage, increase the energy efficiency of our material significantly over the last few years. And that enables our customers to then translate that into the OEMs and ultimately unlock that energy efficiency for use in AI or other things. Blue will be exactly the same. So that energy efficiency can be used for either power-consuming features like AI, thinner form factors because a smaller battery can be used or potentially even the battery lasting on a single charge for a longer period of time because of the less consumption on the display. So there's a lot of different ways that the energy efficiency can be leveraged. But increasing the energy efficiency of the materials has been something that's been fundamental to our business for many years.

Let me ask you about competing technologies. I'll specifically talk about blue and emitters. TADF has been talked about from time to time. Is that or are there any other materials that you're seeing as competitive threats, either to the core red and green business or to blue in the future?

Yes. We don't view anything that's competitive to phosphorescence. And we continue to believe that all paths to high-efficiency blue go through our materials. So we're not concerned about alternative technologies at this point to blue.

What about -- just from a general display standpoint, micro-LED has got a lot of attention a couple of years ago. I think they've run into some scaling issues and otherwise. Are you seeing anything out there that makes you worry from a competitive standpoint in terms of where OLEDs are positioned going forward.

Yes, OLEDs, we believe we have a long runway to grow. We talked earlier about the very low penetration rates that we have today now, especially in the IT and TV markets. We see that as key growth opportunities for us. As you said, micro-LEDs took a little bit above set back last year. There are still folks focused on it. We still believe that the manufacturing challenges will be quite challenging to overcome and continue to believe that OLEDs because of the benefits they bring in terms of energy efficiency, the true blacks, the contrast ratios as well as the fact that there's really an embedded manufacturing capacity for OLEDs and momentum that it will be very difficult to find a cost-competitive solution to OLEDs in the near term.

Certainly, IT is a driver near term, but our other vertical markets like auto starting to creep into the conversation, where does general lighting fit in? That's always been out on the horizon. Is that something you've been worth talking about now? Or is it too far out there?

Yes. I think general lighting is something that there are OLED, the lighting products in market. They are more less cost competitive. We see it as a small growth opportunity for us. Not a lot of material consumption per device compared to the displays. And in terms of automotive, that's a key growth driver for us going forward in terms of continuing to see more autos adopt OLED displays, especially EVs. We've seen a lot of opportunity for growth there. It's a relatively low base. So you're talking roughly 90 million units annually of vehicles sold globally and then a fairly low percentage of OLEDs today within that segment, but an opportunity for growth in the next few years.

Capacity has always been a big driver of the performance of Universal Display. I think the number you talked about capacity growth from an industry perspective, growing 10% from '23 to the end of '25. Now that stated, you were talking about some larger fabs. There are multiple Gen 8.6 fabs that are supposed to come online in 2026. Is 2026 shaping up to be an inflection year from a capacity growth standpoint, given some of these larger substrate facilities, the potential to add some more in the next couple of quarters?

Yes, certainly. And as you said, we expect 10% growth in installed capacity from the end of '23 to the end of '25. It's important to note also that there's some underutilization in the existing installed capacity. So our growth is not limited just by the 10% of new installed capacity coming online. But we certainly do think that in '26 and beyond because there's a number of products, specifically in the IT space that are expected to be introduced over the next few years, and that's a key opportunity for us. And as we said earlier, the size of those displays being larger than a smartphone is also very compelling. Additionally, in IT, something that we haven't talked about yet is the fact that many of the new IT products coming to market have what's called tandem displays, which is a display that has 2 emissive layers. So probably somewhere between 1.5 to 2x the quantity of material from UDC that's required to produce those displays compared to a single layer technology.

And by the way, I apologize for not catching it earlier, but what percentage of the marketplace is moving towards that type of display technology.

In IT, some are tandem, some are still single layer. So it really just depends on the product. So the iPad Pro that was launched last May, has a tandem display, Apple actually marketed it as a tandem display. But there will be products in market. There are many today that are also single-layer IT products that have very nice brightness and lifetime, but it's going to be a mix, we think, going forward. But I don't have an exact percentage for you.

Do you know where industry capacity utilization is these days? You said underutilized, but is there a number that goes along with it?

It depends on the segment. So TVs, for example, we talked earlier about the 10 million to 12 million units of capacity and currently about 7 million of production this year. So -- and then it just varies across the smartphone and IT base today. But we still think that there's room for us to continue to grow even independent of this new capacity that's coming online in the next year or 2?

Maybe we'll wrap up with a simple financial question. You guys are in the luxury position of having about $1 billion on the balance sheet. You generate a lot of free cash flow. You don't have a lot of capital requirements. How are you thinking about cash utilization and returning that to shareholders?

Yes. So we've had a dividend program in place for a number of years. And so returning capital to shareholders is certainly a priority of the management team and the Board. And we've increased that dividend annually as well and we aspire to continue doing that. We do evaluate buybacks periodically. It's just not been something we've done in a meaningful way. And also investing in the business is a priority for us. So looking at either M&A opportunities. We've acquired a number of patent portfolios over the company's history or having the cash on the balance sheet to be able to invest in certain programs from an R&D perspective is also an important priority for us. So there's a number of reasons why we kept the capital in the business. But we also do prioritize returning it to shareholders as well.